Over the past five years, as margin pressure has increased and cost reduction efforts have taken center stage, companies have scanned the enterprise with a fine-tooth comb, looking for opportunities to regain margin. As more data has become available specifically highlighting the magnitude of potential losses from revenue leakage in the channel, this issue has quickly risen on corporate radar screens.

From 2004 to early 2008, the market went through a prolonged education phase, with most companies working to increase their understanding of the problem and accumulate information to construct the necessary business case to justify further IT investment (the average chargeback system is more than six years old). Given this is a nine-figure problem for many companies, revenue leakage as a topic has recently become a CFO-level issue. CFO awareness was actually the best development possible as it has given many revenue management teams the C-level backing they needed to secure funding for IT system upgrades. Much of 2008 and 2009 acted as an evaluation phase, as companies reviewed their existing capabilities and evaluated newer products available on the market. Only recently has the market now begun moving toward a purchase and implementation phase, though this has been somewhat slowed due to the recent economic recession. However, as budgets loosen, this purchasing phase will likely continue for the next 3–4 years, until most of the industry has upgraded its revenue management IT. Unlike CRM and ERP, revenue management systems (such as chargebacks, rebates, and contract management) are an area in which companies are not completely averse to a rip-and-replace strategy, since most solutions today are sold in modular fashion, are platform independent, and come pre-built with streamlined integration to SAP and Oracle back-end infrastructures.

Three years ago, IDC Health Insights published a report that provided the first quantitative breakdown of revenue leakage in the industry. Since then, industry focus on reducing leakage has risen substantially, and life sciences companies are searching for answers to questions like: What is causing this leakage? Where is this money going? How can we reduce revenue leakage? To answer these questions, Health Industry Insights recently surveyed 151 industry leaders and conducted in-depth interviews with 23 pharmaceutical companies to identify channel leakage points and quantify revenue lost. In addition to updated quantification surrounding chargebacks, reverse chargebacks, duplicate chargebacks, product returns, and concealed shortages, new leakage categories have been added surrounding managed care and Medicaid rebates. In total, the study found that revenue leakage causes pharmaceutical companies to lose approximately 4.4% of overall revenue on an annual basis. For 2009, most forecasts predict U.S. pharma sales will be roughly $252 billion. That means as an industry, pharma manufacturers will collectively lose approximately $11 billion through channel inefficiencies. That's equivalent to total revenue for a top 20 pharma simply disappearing each year.

The report, titled Revenue Leakage: Pharma's $11 Billion Problem will be published next week and will be available on our website. Members of the life sciences community will also have the opportunity to see the full detailed results presented in person at IDC Health Insights conference taking place on February 23-24, in Boston, MA. Conference attendance is free for qualified registrants. For more information, go to: http://lifesciencesinsight.com/